form_10q.htm


 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q
 

     (Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________
 
Commission file number 0-12247


SOUTHSIDE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
   
TEXAS
75-1848732
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
1201 S. Beckham, Tyler, Texas
75701
(Address of principal executive offices)
(Zip Code)
 
903-531-7111
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o
Accelerated filer  x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

The number of shares of the issuer's common stock, par value $1.25, outstanding as of July 24, 2009 was 14,894,253 shares.


 
 

 


 
TABLE OF CONTENTS
   
   
 
 
 
 
 
                ITEM 4.  CONTROLS AND PROCEDURES
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 


PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
   
June 30,
   
December 31,
 
ASSETS
 
2009
   
2008
 
Cash and due from banks
  $ 45,205     $ 64,067  
Interest earning deposits
    3,824       557  
Federal funds sold
    -       2,150  
Total cash and cash equivalents
    49,029       66,774  
Investment securities:
               
Available for sale, at estimated fair value
    216,869       278,378  
Held to maturity, at cost
    1,493       478  
Mortgage-backed and related securities:
               
Available for sale, at estimated fair value
    1,052,318       1,026,513  
Held to maturity, at cost
    240,704       157,287  
Federal Home Loan Bank stock, at cost
    39,476       39,411  
Other investments, at cost
    2,064       2,065  
Loans held for sale
    6,069       511  
Loans:
               
Loans
    1,016,967       1,022,549  
Less:  allowance for loan loss
    (18,804 )     (16,112 )
      Net Loans
    998,163       1,006,437  
Premises and equipment, net
    46,062       42,722  
Goodwill
    22,034       22,034  
Other intangible assets, net
    1,280       1,479  
Interest receivable
    14,570       16,352  
Deferred tax asset
    3,208       2,852  
Other assets
    49,938       36,945  
TOTAL ASSETS
  $ 2,743,277     $ 2,700,238  
LIABILITIES AND EQUITY
               
Deposits:
               
Noninterest bearing
  $ 375,312     $ 390,823  
Interest bearing
    1,321,223       1,165,308  
Total Deposits
    1,696,535       1,556,131  
Short-term obligations:
               
Federal funds purchased and repurchase agreements
    20,391       10,629  
FHLB advances
    80,512       229,385  
Other obligations
    3,962       1,857  
Total Short-term obligations
    104,865       241,871  
Long-term obligations:
               
FHLB  advances
    609,838       655,489  
Long-term debt
    60,311       60,311  
Total Long-term obligations
    670,149       715,800  
Other liabilities
    88,878       25,347  
TOTAL LIABILITIES
    2,560,427       2,539,149  
                 
       Off-Balance-Sheet Arrangements, Commitments and Contingencies (Note 12)
               
                 
Shareholders' equity:
               
Common stock - $1.25 par, 40,000,000 shares authorized, 16,656,514 shares
    20,821       19,695  
 issued in 2009 and 15,756,096 shares issued in 2008
               
Paid-in capital
    145,301       131,112  
Retained earnings
    40,109       34,021  
Treasury stock (1,762,261 and 1,731,570 shares at cost)
    (23,545 )     (23,115 )
Accumulated other comprehensive loss
    (392 )     (1,096 )
TOTAL SHAREHOLDERS' EQUITY
    182,294       160,617  
Noncontrolling interest
    556       472  
TOTAL EQUITY
    182,850       161,089  
TOTAL LIABILITIES AND EQUITY
  $ 2,743,277     $ 2,700,238  

The accompanying notes are an integral part of these consolidated financial statements.

 
1

 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest income
                       
Loans
  $ 17,882     $ 17,767     $ 36,195     $ 36,063  
Investment securities – taxable
    289       390       608       1,070  
Investment securities – tax-exempt
    1,379       1,160       2,873       1,978  
Mortgage-backed and related securities
    16,075       12,020       32,479       23,993  
Federal Home Loan Bank stock and other investments
    48       214       152       476  
Other interest earning assets
    54       24       80       91  
Total interest income
    35,727       31,575       72,387       63,671  
Interest expense
                               
Deposits
    5,686       7,868       12,058       18,623  
Short-term obligations
    1,170       1,839       2,335       5,139  
Long-term obligations
    6,416       3,973       13,302       6,644  
Total interest expense
    13,272       13,680       27,695       30,406  
Net interest income
    22,455       17,895       44,692       33,265  
Provision for loan losses
    3,417       2,947       7,007       5,186  
Net interest income after provision for loan losses
    19,038       14,948       37,685       28,079  
Noninterest income
                               
Deposit services
    4,417       4,667       8,452       9,084  
Gain on sale of securities available for sale
    5,911       3,660       19,707       5,752  
                                 
Total other-than-temporary impairment losses
    -       -       (5,627 )     -  
Portion of gain (loss) recognized in other comprehensive income (before taxes)
    (537 )     -       4,190       -  
Net impairment losses recognized in earnings
    (537 )     -       (1,437 )     -  
                                 
Gain on sale of loans
    547       847       882       1,312  
Trust income
    574       619       1,137       1,212  
Bank owned life insurance income
    736       758       1,037       1,068  
Other
    745       736       1,529       1,561  
Total noninterest income
    12,393       11,287       31,307       19,989  
Noninterest expense
                               
Salaries and employee benefits
    10,460       8,806       20,944       17,519  
Occupancy expense
    1,565       1,427       2,983       2,815  
Equipment expense
    414       329       789       641  
Advertising, travel & entertainment
    494       496       1,003       960  
ATM and debit card expense
    361       304       660       592  
Director fees
    166       147       312       291  
Supplies
    206       206       418       383  
Professional fees
    455       353       1,085       787  
Postage
    192       182       380       366  
Telephone and communications
    363       257       644       515  
FDIC Insurance
    1,925       232       2,461       468  
Other
    1,687       1,594       3,126       3,299  
Total noninterest expense
    18,288       14,333       34,805       28,636  
                                 
Income before income tax expense
    13,143       11,902       34,187       19,432  
Provision for income tax expense
    3,255       3,223       9,401       5,159  
Net income
    9,888       8,679       24,786       14,273  
Less: Net income attributable to the noncontrolling interest
    (511 )     (148 )     (1,264 )     (196 )
Net income attributable to Southside Bancshares, Inc.
  $ 9,377     $ 8,531     $ 23,522     $ 14,077  
Earnings per common share – basic
  $ 0.63     $ 0.59     $ 1.59     $ 0.97  
Earnings per common share – diluted
  $ 0.62     $ 0.57     $ 1.57     $ 0.94  
Dividends paid per common share
  $ 0.14     $ 0.13     $ 0.27     $ 0.25  


The accompanying notes are an integral part of these consolidated financial statements.

 
2

 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in thousands, except share amounts)
   
Common Stock
   
Paid-in Capital
   
Retained Earnings
   
Treasury Stock
   
Accumu-lated
Other
Compre-
hensive
 Income (Loss)
   
Non-
controlling Interest
   
Total
Equity
 
                                           
Balance at December 31, 2007
  $ 18,581     $ 115,250     $ 26,187     $ (22,983 )   $ (4,707 )   $ 498     $ 132,826  
Comprehensive Income
                                                       
Net income
                    14,077                       196       14,273  
Other comprehensive income, net of tax
(see Note 3)
                                                       
Net unrealized gains on available-for-sale securities
                                    826               826  
Reclassification adjustment for unrealized gains on sales of available-for-sale securities included in net income
                                    (3,739 )             (3,739 )
Adjustment to net periodic benefit cost
                                    285               285  
Total comprehensive income
                                                    11,645  
Common stock issued (99,306 shares)
    124       796                                       920  
Stock compensation expense
            7                                       7  
Tax benefit of incentive stock options
            145                                       145  
Cumulative effect of adoption of a new accounting principle on January 1, 2008
                    (351 )                             (351 )
Dividends paid on common stock
                    (3,377 )                             (3,377 )
Purchase of 6,713 shares of common stock
                            (132 )                     (132 )
Capital distribution
                                            (407 )     (407 )
Stock dividend
    824       13,422       (14,246 )                             -  
Balance at June 30, 2008
  $ 19,529     $ 129,620     $ 22,290     $ (23,115 )   $ (7,335 )   $ 287     $ 141,276  
                                                         
Balance at December 31, 2008
  $ 19,695     $ 131,112     $ 34,021     $ (23,115 )   $ (1,096 )   $ 472     $ 161,089  
Comprehensive Income
                                                       
Net income
                    23,522                       1,264       24,786  
Other comprehensive income, net of tax
(see Note 3)
                                                       
Net unrealized gains on available-for-sale securities
                                    14,859               14,859  
Reclassification adjustment for unrealized gains on sales of available-for-sale securities included in net income
                                    (12,810 )             (12,810 )
Non-credit portion of other-than-temporary impairment losses on available-for-sale securities
                                    (2,723 )             (2,723 )
Other-than-temporary impairment charges on available-for-sale securities included in net income
                                    934               934  
Adjustment to net periodic benefit cost
                                    444               444  
Total comprehensive income
                                                    25,490  
Common stock issued (191,440 shares)
    240       1,129                                       1,369  
Tax benefit of incentive stock options
            419                                       419  
Dividends paid on common stock
                    (3,907 )                             (3,907 )
Purchase of 30,691 shares of common stock
                            (430 )                     (430 )
Capital distribution
                                            (1,180 )     (1,180 )
Stock dividend declared
    886       12,641       (13,527 )                             -  
Balance at June 30, 2009
  $ 20,821     $ 145,301     $ 40,109     $ (23,545 )   $ (392 )   $ 556     $ 182,850  


The accompanying notes are an integral part of these consolidated financial statements.

 
3

 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
   
Six Months Ended
June 30,
 
   
2009
   
2008
 
             
OPERATING ACTIVITIES:
           
Net income
  $ 24,786     $ 14,273  
Adjustments to reconcile net income to net cash provided by operations:
               
Depreciation
    1,316       1,209  
Amortization of premium
    6,299       3,667  
Accretion of discount and loan fees
    (1,969 )     (1,900 )
Provision for loan losses
    7,007       5,186  
Stock compensation expense
          7  
Decrease (increase) in interest receivable
    1,782       (579 )
Increase in other assets
    (1,097 )     (1,457 )
Net change in deferred taxes
    (750 )     (382 )
Decrease in interest payable
    (1,170 )     (638 )
Increase in other liabilities
    5,575       1,886  
(Increase) decrease in loans held for sale
    (5,558 )     569  
Gain on sale of securities available for sale
    (19,707 )     (5,752 )
Net other-than-temporary impairment losses
    1,437        
Loss on sale of assets
          18  
Loss on disposal of assets
    37        
Loss on sale of other real estate owned
    1       86  
Net cash provided by operating activities
    17,989       16,193  
                 
INVESTING ACTIVITIES:
               
Proceeds from sales of investment securities available for sale
    158,151       73,858  
Proceeds from sales of mortgage-backed securities available for sale
    258,456       148,645  
Proceeds from maturities of investment securities available for sale
    50,275       64,505  
Proceeds from maturities of mortgage-backed securities available for sale
    135,738       62,586  
Proceeds from maturities of mortgage-backed securities held to maturity
    26,082       17,776  
Proceeds from redemption of FHLB stock
          619  
Purchases of investment securities available for sale
    (89,880 )     (136,184 )
Purchases of investment securities held to maturity
    (1,014 )      
Purchases of mortgage-backed securities available for sale
    (401,173 )     (326,961 )
Purchases of mortgage-backed securities held to maturity
    (110,035 )     (1,664 )
Purchases of FHLB stock and other investments
    (64 )     (9,626 )
Net increase in loans
    (2,036 )     (22,266 )
Purchases of premises and equipment
    (4,693 )     (1,201 )
Proceeds from sales of premises and equipment
          358  
Proceeds on bank owned life insurance
    1,086        
Proceeds from sales of other real estate owned
    217       139  
Proceeds from sales of repossessed assets
    1,195       2,108  
Net cash provided by (used in) investing activities
    22,305       (127,308 )


The accompanying notes are an integral part of these consolidated financial statements.


 
4

 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in thousands)
   
Six Months Ended
 
   
June 30,
 
   
2009
   
2008
 
FINANCING ACTIVITIES:
           
 Net increase in demand and savings accounts
   
1,371
     
88,978
 
 Net increase (decrease) in certificates of deposit
   
129,081
     
(122,340
)
 Net increase in federal funds purchased and repurchase agreements
   
9,762
     
2,222
 
 Proceeds from FHLB Advances
   
3,051,206
     
9,423,627
 
 Repayment of FHLB Advances
   
(3,245,730
)
   
(9,288,126
)
 Net capital distributions from non-controlling interest in consolidated entities
   
(1,180
)
   
(407
)
 Tax benefit of incentive stock options
   
419
     
145
 
 Purchase of common stock
   
(430
)
   
(132
)
 Proceeds from the issuance of common stock
   
1,369
     
920
 
 Dividends paid
   
(3,907
)
   
(3,377
)
      Net cash (used in) provided by financing activities
   
(58,039
)
   
101,510
 
                 
Net decrease in cash and cash equivalents
   
(17,745
)
   
(9,605
)
Cash and cash equivalents at beginning of period
   
66,774
     
76,004
 
Cash and cash equivalents at end of period
 
$
49,029
   
$
66,399
 
                 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
               
 Interest paid
 
$
28,865
   
$
31,044
 
 Income taxes paid
   
7,500
     
5,425
 
                 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
               
 Acquisition of other repossessed assets and real estate through foreclosure
 
$
5,428
   
$
3,484
 
 5% stock dividend
   
13,527
     
14,246
 
 Adjustment to pension liability
   
(682
)
   
(262
)
 Unsettled trades to purchase securities
   
(61,913
)
   
(17,874
)
 Unsettled trades to sell securities
   
     
725
 
 Unsettled issuances of brokered CDs
   
9,900
     
 

The accompanying notes are an integral part of these consolidated financial statements



 
5

 

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1.     Basis of Presentation

In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries.  The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc.  The words “Southside Bank” and “the Bank” refer to Southside Bank (which, subsequent to the internal merger of Fort Worth National Bank (“FWNB”) with and into Southside Bank, includes FWNB).  The word “FWBS” refers to Fort Worth Bancshares, Inc.  The word “SFG” refers to Southside Financial Group, LLC., of which Southside owns a 50% interest and consolidates for financial reporting.

The consolidated balance sheet as of June 30, 2009, and the related consolidated statements of income, equity and cash flows and notes to the financial statements for the three and six month periods ended June 30, 2009 and 2008 are unaudited; in the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included.  Such adjustments consisted only of normal recurring items.  All significant intercompany accounts and transactions are eliminated in consolidation.  The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment.  Actual amounts could differ from these estimates.  We have evaluated subsequent events for potential recognition and or disclosure through August 7, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

Interim results are not necessarily indicative of results for a full year.  These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2008.  All share data has been adjusted to give retroactive recognition to stock splits and stock dividends.  For a description of our significant accounting and reporting policies, refer to Note 1 of the Notes to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008.

2.     Earnings Per Share

Earnings per share attributable to Southside Bancshares, Inc. on a basic and diluted basis has been adjusted to give retroactive recognition to stock splits and stock dividends and is calculated as follows (in thousands, except per share amounts):
 
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
                         
   
2009
   
2008
   
2009
   
2008
 
    Basic and Diluted Earnings:
                       
       Net Income - Southside Bancshares, Inc.
  $ 9,377     $ 8,531     $ 23,522     $ 14,077  
                                 
      Basic weighted-average shares outstanding
    14,866       14,537       14,808       14,517  
       Add:   Stock options
    133       364       174       368  
       Diluted weighted-average shares outstanding
    14,999       14,901       14,982       14,885  
                                 
    Basic Earnings Per Share:
                               
       Net Income - Southside Bancshares, Inc.
  $ 0.63     $ 0.59     $ 1.59     $ 0.97  
                                 
    Diluted Earnings Per Share:
                               
       Net Income - Southside Bancshares, Inc.
  $ 0.62     $ 0.57     $ 1.57     $ 0.94  
 
For the three and six month periods ended June 30, 2009 and 2008, there were no antidilutive options.

 
6

 

3.  Comprehensive Income(Loss)

The components of other comprehensive income (loss) are as follows (in thousands):

   
Six Months Ended June 30, 2009
 
   
Before-Tax
   
Tax (Expense)
   
Net-of-Tax
 
   
Amount
   
Benefit
   
Amount
 
Unrealized gains on securities:
                 
Unrealized holding gains arising during period
  $ 22,860     $ (8,001 )   $ 14,859  
Non credit portion of other-than-temporary temporary impairment losses on the AFS securities
    (4,190 )     1,467       (2,723 )
Less:  reclassification adjustment for gains
                       
   included in net income
    19,707       (6,897 )     12,810  
Less:  other-than-temporary impairment charges
 on AFS securities included in net income
    (1,437 )     503       (934 )
Net unrealized gains on securities
    400       (140 )     260  
   Change in pension plans
    682       (238 )     444  
Other comprehensive income
  $ 1,082     $ (378 )   $ 704  

 
Three Months Ended June 30, 2009
 
 
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
 
Amount
 
Benefit
 
Amount
 
Unrealized losses on securities:
           
Unrealized holding gains arising during period
  $ 1,894     $ (662 )   $ 1,232  
Less:  reclassification adjustment for gains
                       
  included in net income
    5,911       (2,068 )     3,843  
   Less: other-than-temporary impairment charges
             on AFS securities included in net income
    (537 )     188       (349 )
Net unrealized losses on securities
    (3,480 )     1,218       (2,262 )
   Change in pension plans
    361       (126 )     235  
Other comprehensive loss
  $ (3,119 )   $ 1,092     $ (2,027 )

 
Six Months Ended June 30, 2008
 
 
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
 
Amount
 
Benefit
 
Amount
 
Unrealized losses on securities:
           
Unrealized holding gains arising during period
  $ 1,337     $ (511 )   $ 826  
Less:  reclassification adjustment for gains
                       
  included in net income
    5,752       (2,013 )     3,739  
Net unrealized losses on securities
    (4,415 )     1,502       (2,913 )
   Change in pension plans
    262       23       285  
Other comprehensive loss
  $ (4,153 )   $ 1,525     $ (2,628 )



 
7

 


 
Three Months Ended June 30, 2008
 
 
Before-Tax
 
Tax (Expense)
 
Net-of-Tax
 
 
Amount
 
Benefit
 
Amount
 
Unrealized losses on securities:
           
Unrealized holding losses arising during period
  $ (9,626 )   $ 3,369     $ (6,257 )
Less:  reclassification adjustment for gains
                       
  included in net income
    3,660       (1,281 )     2,379  
Net unrealized losses on securities
    (13,286 )     4,650       (8,636 )
   Change in pension plans
    141       (49 )     92  
Other comprehensive loss
  $ (13,145 )   $ 4,601     $ (8,544 )

4. Securities

The amortized cost and estimated market value of investment and mortgage-backed securities as of June 30, 2009 and December 31, 2008, are reflected in the tables below (in thousands):
   
June 30, 2009
 
               
Gross Unrealized Losses
     
 AVAILABLE FOR SALE:
   
Amortized Cost
   
Gross Unrealized Gains
 
OTTI
 
Other
 
Estimated Market Value
 
Investment Securities:
                               
U.S. Treasury
 
$
4,936
 
$
17
 
$
 
$
 
$
4,953
 
Government-Sponsored Enterprise Debentures
   
14,326
   
   
   
206
   
14,120
 
State and Political Subdivisions
   
197,878
   
1,373
   
   
2,694
   
196,557
 
Other Stocks and Bonds
   
5,274
   
296
   
4,190
   
141
   
1,239
 
Mortgage-backed Securities:
                               
U.S. Government Agencies
   
98,824
   
3,448
   
   
   
102,272
 
Government-Sponsored Enterprises
   
925,807
   
24,395
   
   
156
   
950,046
 
Total
 
$
1,247,045
 
$
29,529
 
$
4,190
 
$
3,197
 
$
1,269,187
 

   
June 30, 2009
 
               
Gross Unrealized Losses
     
 HELD TO MATURITY:
   
Amortized Cost
   
Gross Unrealized Gains
 
OTTI
 
Other
 
Estimated Market Value
 
Investment Securities:
                               
State and Political Subdivisions
 
$
1,014
 
$
35
 
$
 
$
 
$
1,049
 
Other Stocks and Bonds
   
479
   
7
   
   
   
486
 
Mortgage-backed Securities:
                               
U.S. Government Agencies
   
19,357
   
463
   
   
   
19,820
 
Government-Sponsored Enterprises
   
221,347
   
3,969
   
   
45
   
225,271
 
Total
 
$
242,197
 
$
4,474
 
$
 
$
45
 
$
246,626
 

   
December 31, 2008
AVAILABLE FOR SALE:
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Market Value
Investment Securities:
                     
U.S. Treasury
$
5,008
 
$
23
 
$
 
$
5,031
Government-Sponsored Enterprise Debentures
 
60,325
   
227
   
1
   
60,551
State and Political Subdivisions
 
203,052
   
10,154
   
1,612
   
211,594
Other Stocks and Bonds
 
6,711
   
   
5,509
   
1,202
Mortgage-backed Securities:
                     
   U.S. Government Agencies
 
166,123
   
2,405
   
229
   
168,299
   Government-Sponsored Enterprises
 
841,737
   
17,984
   
1,507
   
858,214
Total
$
1,282,956
 
$
30,793
 
$
8,858
 
$
1,304,891

 
8

 

   
December 31, 2008
 
HELD TO MATURITY:
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated Market Value
 
Investment Securities:
                       
   Other Stocks and Bonds
  $ 478     $ 9     $     $ 487  
Mortgage-backed Securities:
                               
   U.S. Government Agencies
    22,778       300             23,078  
   Government-Sponsored Enterprises
    134,509       1,890       26       136,373  
Total
  $ 157,765     $ 2,199     $ 26     $ 159,938  

The following table represents the unrealized loss on securities for the six months ended June 30, 2009 and year ended December 31, 2008 (in thousands):

 
Less Than 12 Months
 
More Than 12 Months
 
Total
 
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
As of June 30, 2009:
                       
                         
Available for Sale
                       
Government-Sponsored Enterprise Debentures
  $ 14,120     $ 206     $     $     $ 14,120     $ 206  
State and Political Subdivisions
    80,256       2,221       5,876       473       86,132       2,694  
Other Stocks and Bonds
                1,239       4,331       1,239       4,331  
Mortgage-Backed Securities
    75,678       128       2,848       28       78,526       156  
Total
  $ 170,054     $ 2,555     $ 9,963     $ 4,832     $ 180,017     $ 7,387  
                                                 
Held to Maturity
                                               
Mortgage-Backed Securities
  $ 4,538     $ 45     $     $     $ 4,538     $ 45  
Total
  $ 4,538     $ 45     $     $     $ 4,538     $ 45  

As of December 31, 2008:
                                   
                                     
Available for Sale
                                   
Government-Sponsored Enterprise Debentures
  $ 29,999     $ 1     $     $     $ 29,999     $ 1  
State and Political Subdivisions
    45,686       1,496       1,193       116       46,879       1,612  
Other Stocks and Bonds
    253       89       949       5,420       1,202       5,509  
Mortgage-Backed Securities
    116,616       1,517       17,174       219       133,790       1,736  
Total
  $ 192,554     $ 3,103     $ 19,316     $ 5,755     $ 211,870     $ 8,858  
                                                 
Held to Maturity
                                               
Mortgage-Backed Securities
  $ 1,212     $ 1     $ 4,540     $ 25     $ 5,752     $ 26  
Total
  $ 1,212     $ 1     $ 4,540     $ 25     $ 5,752     $ 26  
                                                 

The turmoil in the capital markets had a significant impact on our estimate of fair value for certain of our securities.  We believe the market values are reflective of a combination of illiquidity and credit impairment.  At June 30, 2009 we have, in Available for Sale (“AFS”) Other Stocks and Bonds, $4.6 million cost basis in pooled trust preferred securities (“TRUPs”).  Those securities are structured products with cash flows dependent upon securities issued by U.S. financial institutions, including banks and insurance companies.  Our estimate of fair value at June 30, 2009 for the TRUPs is approximately $669,000 and reflects the market illiquidity.  With the exception of the TRUPs, to the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and mortgage-backed securities portfolio at June 30, 2009 with an other-than-temporary impairment.

Given the facts and circumstances associated with the TRUPs we performed detailed cash flow modeling for each TRUP using an industry-accepted model. Prior to loading the required assumptions into the model we reviewed the financial condition of each of the underlying issuing banks within the TRUP collateral pool that had not deferred or defaulted as of June 30, 2009.  Management’s best estimate of a deferral assumption was assigned to each issuing bank based on the category in which it fell.  Our analysis of the underlying cash flows contemplated various default, deferral and recovery scenarios to arrive at our best estimate of cash flows.  Based on that detailed analysis, we have concluded that the other-than-temporary impairment, which captures the credit component in compliance with the new Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) SFAS 115-2 and SFAS 124-2,

 
9

 

“Recognition and Presentation of Other-Than-Temporary Impairments,” was estimated at $1.4 million at June 30, 2009 and the non credit charge to other comprehensive income was estimated at $3.9 million.  Therefore, the carrying amount of the TRUPs was written down with $1.4 million recognized in earnings as of June 30, 2009.  The cash flow model assumptions represent management’s best estimate and consider a variety of qualitative factors, which include, among others, the credit rating downgrades, the severity and duration of the mark-to-market loss, and the structural nuances of each TRUP.  Management believes that the detailed review of the collateral and cash flow modeling support the conclusion that the TRUPs had an other-than-temporary impairment at June 30, 2009.  We will continue to update our assumptions and the resulting analysis each reporting period to reflect changing market conditions.  Additionally, we do not currently intend to sell the TRUPs and it is not more likely than not that we will be required to sell the TRUPs before the anticipated recovery of their amortized cost basis.

The table below provides more detail on the TRUPs (dollars in thousands).


 
 TRUP
   
 
Par
   
Credit
Loss
   
 
Amortized Cost
   
 
Fair Value
   
 
Tranche
   
 
Credit Rating
                                     
1
 
$
2,000
 
$
   316
 
$
1,684
 
$
206
   
C1
   
Ca
2
   
2,000
   
     50
   
1,950
   
274
   
B1
   
Ca
3
   
2,000
   
1,071
   
  929
   
189
   
B2
   
Ca
   
$
6,000
 
$
1,437
 
$
4,563
 
$
669
           

The following table presents the impairment activity related to credit loss, which is recognized in earnings, and the impairment activity related to all other factors, which are recognized in other comprehensive income.
 
 
Six Months Ended June 30, 2009
 
 
Impairment Related to Credit Loss
 
Impairment Related to All Other Factors
 
Total Impairment
 
 
 
                   
Balance, beginning of the period
  $     $     $  
Charges on securities for which other-than-temporary impairment charges were not previously recognized
    1,437       4,190       5,627  
Additional charges on securities for which other-than-temporary impairment charges were previously recognized
                 
Balance, end of the period
  $ 1,437     $ 4,190     $ 5,627  

 
Three Months Ended June 30, 2009
 
 
Impairment Related to Credit Loss
 
Impairment Related to All Other Factors
 
Total Impairment
 
 
 
                   
Balance, beginning of the period
  $ 900     $ 4,727     $ 5,627  
Charges on securities for which other-than-temporary impairment charges were not previously recognized
                 
Additional charges on securities for which other-than-temporary impairment charges were previously recognized
    537       (537 )      
Balance, end of the period
  $ 1,437     $ 4,190     $ 5,627  


There were no securities transferred from AFS to Held to Maturity (“HTM”) during the six months ended June 30, 2009 and 2008.  There were no sales from the HTM portfolio during the six months ended June 30, 2009 or 2008.  There were $242.2 million of securities classified as HTM for the six months ended June 30, 2009 compared to $157.8 million of securities classified as HTM for the year ended December 31, 2008.

Of the $19.7 million in net securities gains from the AFS portfolio for the six months ended June 30, 2009, there were $19.8 million in realized gains and $99,000 in realized losses.  Of the $5.8 million in net securities gains from the AFS portfolio for the six months ended June 30, 2008, there were $5.9 million in realized gains and $53,000 in realized losses.

 
10

 

The amortized cost and fair value of securities at June 30, 2009 are presented below by contractual maturity.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Mortgage-backed securities are presented in total by category due to the fact that mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with varying maturities.  The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder.  The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.

 
   
June 30, 2009
 
   
Amortized Cost
   
Fair Value
 
   
(in thousands)
 
             
Available for sale securities:
           
             
Investment Securities
           
Due in one year or less
  $ 8,559     $ 8,629  
Due after one year through five years
    9,135       9,388  
Due after five years through ten years
    22,829       23,115  
Due after ten years
    181,891       175,737  
      222,414       216,869  
Mortgage-backed securities
    1,024,631       1,052,318  
Total
  $ 1,247,045     $ 1,269,187  

 
   
Amortized Cost
   
Fair Value
 
   
(in thousands)
 
             
Held to maturity securities:
           
             
Investment Securities
           
Due in one year or less
  $     $  
Due after one year through five years
           
Due after five years through ten years
    479       486  
Due after ten years
    1,014       1,049  
      1,493       1,535  
Mortgage-backed securities
    240,704       245,091  
Total
  $ 242,197     $ 246,626  

Investment and mortgage-backed securities with book values of $858.2 million at June 30, 2009 and $952.6 million at December 31, 2008 were pledged to collateralize Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, public funds and trust deposits or for other purposes as required by law.


 
11

 

5.  Loans and Allowance for Probable Loan Losses

The following table sets forth loan totals by category for the periods presented (in thousands):

 
At
   
At
 
 
June 30,
   
December 31,
 
 
2009
   
2008
 
Real Estate Loans:
         
   Construction
  $ 100,012     $ 120,153  
   1-4 Family Residential
    235,365       238,693  
   Other
    193,167       184,629  
Commercial Loans
    164,965       165,558  
Municipal Loans
    139,483       134,986  
Loans to Individuals
    183,975       178,530  
Total Loans
  $ 1,016,967     $ 1,022,549  

The summaries of the Allowance for Loan Losses and Reserve for Unfunded Loan Commitments are as follows (in thousands):

   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
                         
   
2009
   
2008
   
2009
   
2008
 
Allowance for Loan Losses:
                       
                         
Balance at beginning of period
  $ 17,432     $ 10,611     $ 16,112     $ 9,753  
Provision for loan losses
    3,417       2,947       7,007       5,186  
Loans charged off
    (2,465 )     (2,542 )     (5,169 )     (4,400 )
Recoveries of loans charged off
    420       511       854       988  
Balance at end of period
  $ 18,804     $ 11,527     $ 18,804     $ 11,527  
                                 
Reserve for Unfunded Loan Commitments:
                               
                                 
Balance at beginning of period
  $ 7     $ 70     $ 7     $ 50  
Provision for gains (losses) on unfunded loan
      commitments
    2       (64 )     2       (44 )
Balance at end of period
  $ 9     $ 6     $ 9     $ 6  


 
12

 

6.  Goodwill and Core Deposit Intangible Assets

Goodwill.  Goodwill totaled $22.0 million at both June 30, 2009 and December 31, 2008.
 
We measured our goodwill for impairment at December 31, 2008.  As a result of merging FWNB into Southside Bank in the third quarter of 2008, we have identified Southside Bank as the sole operating segment and reporting unit for our impairment assessment.
 
Step one of the impairment test involves comparing the fair value of the reporting unit which, in our case, is the entire entity, to the carrying value of the reporting unit.  If the fair value of the reporting unit is greater than the carrying value of the reporting unit, no additional testing is required. If the fair value of the reporting unit is less than the carrying value of the reporting unit, step two of the impairment test must be performed.  At December 31, 2008, the fair value of the reporting unit was greater than the carrying value of the reporting unit.  As a result, we did not record any goodwill impairment for the year ended December 31, 2008.  As of June 30, 2009, there were no trigger events to warrant an updated impairment analysis.

During the fourth quarter of 2007, we recorded core deposit intangibles totaling $2.0 million in connection with the acquisition of FWBS.  Core deposit intangibles are amortized on an accelerated basis over their estimated lives, which range from four to ten years.

Core Deposit Intangibles.  Core deposit intangible assets were as follows (in thousands):

   
Gross Intangible Assets
   
Accumulated Amortization